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The 3 Percent Deficit Rule: Theocracy as Logic

By

Satish Chandra Mishra.

Dr. Satish Chandra Mishra, an economist educated at Oxford and Cambridge with senior past experience at the United Nations (UNDP), OECD, and USAID, is the Founder and Executive Director of Arthashastra Institute, Bali, Indonesia.

 

 

In 1981, Guy Abeille, a French budget official, invented a number. President Francois Mitterrand needed something simple to say to ministers demanding money. Abeille opted for three percent of GDP budget deficit as a working hypothesis and an expedient rule of thumb. No model produced it. No theory backs it. It was all the result of an evening’s improvisation.

No one could have predicted the future of such a hurried conjecture. The IMF and World Bank put it on the global map. They stamped that figure into loan conditions and credibility assessments. Soon a rule of thumb hardened into doctrine. Rating agencies and index makers watched it. Investors took their cue from it. A rule invented in a single fireside evening soon took on all the attributes of a new theocracy.

Ironically, it was the very countries, Germany and France, that within six years of putting it into the Maastricht treaty, waived their own penalties in 2003. Brussels suspended the whole framework again for four straight years through the pandemic and the war in Ukraine.

At the same time, economies that actually closed the gap with the rich world never let this ceiling slow them down in the first place. China ran deficits and directed state investment at whatever scale the moment required, for four decades, and grew from poverty to the world’s second-largest economy without pausing to check a number invented in Paris. South Korea’s own developmental state did not industrialize inside that constraint either. India, its own fiscal responsibility law notwithstanding, has repeatedly missed and revised its deficit targets in the pursuit of growth it judged more urgent than the arithmetic.

In the age of discontinuity unfolding before our very eyes today, it is time to understand that slow to moderate growth, and low fiscal deficit, go beyond a prudent policy choice in the world today. On the contrary, giving up on accelerated growth is the hidden danger of our own imagining and lack of national confidence.

The reasons are very familiar. We live in an age of AI, trillion dollar oligarchies and the end of a unipolar world: something humankind has never witnessed before.

In this fast evolving world, India and Indonesia together have an undeniable claim to form Asia’s second pole to China’s own rise. That claim rests on history, strategic location and economic weight: not on how faithfully either has adhered to a 3 percent budget deficit ceiling.

The 3 percent ceiling also ignores strategic emergencies. Consider defense. Indonesia has spent roughly 0.8 percent of GDP on its military for a decade, the lowest ratio in Southeast Asia, well behind Malaysia and Thailand, a fraction of Singapore’s. A nation with the largest archipelago on earth, contested waters on more than one border, and ambitions to sit at the top table of a multipolar Asia cannot get there on a budget this thin. In similar circumstances most governments would simply choose to ignore the 3 percent rule.

Nor is Indonesia in a weak position to do so. Against the world’s fifty largest economies, its deficit sits somewhere in the middle, not the end. Its public debt, near 41 percent of GDP, is much lower than the average 69 percent for the group.

Indonesia has a population still young while much of the world ages, a democracy that has produced five peaceful transfers of power since 1999, and an excellent fiscal position despite its low tax to GDP ratio. It has earned the right to be more ambitious; to stand up and be counted on the global stage.

But the growth that history demands today cannot only be high. It has also to be inclusive, or it will not hold the country together long enough to matter. A nation spread across thousands of islands and hundreds of ethnic communities does not stay unified on GDP growth alone; it stays unified when growth reaches Ambon as well as Jakarta.

Nation-building and high growth are not two separate projects competing for the same rupiah. They are the same project.

This is generational work, sustained across a change of government and a change of decade the way China’s and Korea’s own commitments were, not one finance minister’s project.

A rule invented in one evening in Paris, enforced ever since by institutions that have never themselves obeyed it, ignored outright by every economy that actually grew enough to matter, was not founded on the dry logic of economic reasoning. It was based on an inherited faith that defies both logic and the needs of the day.

In fact, Abeille’s 3 percent rule was never meant to answer any serious question at all. It was a guess, a hunch, a convenience of the moment that founded an economic theocracy.

Faith and investor confidence worked when the world stood still long enough to turn hunch into prejudice. That is not the case now.

Indonesia does not merely need a different figure to replace 3 percent. It needs to face the emerging global future with logic and reason rather than inherited faith. It is time for an open, rational debate about what kind of fiscal rule actually serves a country ready to stand inside Asia’s second pole, and to breach the technological frontier.

In 1981, Guy Abeille, a French budget official, invented a number. President Francois Mitterrand needed something simple to say to ministers demanding money. Abeille opted for three percent of GDP budget deficit as a working hypothesis and an expedient rule of thumb. No model produced it. No theory backs it. It was all the result of an evening’s improvisation.

No one could have predicted the future of such a hurried conjecture. The IMF and World Bank put it on the global map. They stamped that figure into loan conditions and credibility assessments. Soon a rule of thumb hardened into doctrine. Rating agencies and index makers watched it. Investors took their cue from it. A rule invented in a single fireside evening soon took on all the attributes of a new theocracy.

Ironically, it was the very countries, Germany and France, that within six years of putting it into the Maastricht treaty, waived their own penalties in 2003. Brussels suspended the whole framework again for four straight years through the pandemic and the war in Ukraine.

At the same time, economies that actually closed the gap with the rich world never let this ceiling slow them down in the first place. China ran deficits and directed state investment at whatever scale the moment required, for four decades, and grew from poverty to the world’s second-largest economy without pausing to check a number invented in Paris. South Korea’s own developmental state did not industrialize inside that constraint either. India, its own fiscal responsibility law notwithstanding, has repeatedly missed and revised its deficit targets in the pursuit of growth it judged more urgent than the arithmetic.

In the age of discontinuity unfolding before our very eyes today, it is time to understand that slow to moderate growth, and low fiscal deficit, go beyond a prudent policy choice in the world today. On the contrary, giving up on accelerated growth is the hidden danger of our own imagining and lack of national confidence.

The reasons are very familiar. We live in an age of AI, trillion-dollar oligarchies and the end of a unipolar world: something humankind has never witnessed before.

In this fast evolving world, India and Indonesia together have an undeniable claim to form Asia’s second pole to China’s own rise. That claim rests on history, strategic location and economic weight: not on how faithfully either has adhered to a 3 percent budget deficit ceiling.

The 3 percent ceiling also ignores strategic emergencies. Consider defense. Indonesia has spent roughly 0.8 percent of GDP on its military for a decade, the lowest ratio in Southeast Asia, well behind Malaysia and Thailand, a fraction of Singapore’s. A nation with the largest archipelago on earth, contested waters on more than one border, and ambitions to sit at the top table of a multipolar Asia cannot get there on a budget this thin. In similar circumstances most governments would simply choose to ignore the 3 percent rule.

Nor is Indonesia in a weak position to do so. Against the world’s fifty largest economies, its deficit sits somewhere in the middle, not the end. Its public debt, near 41 percent of GDP, is much lower than the average 69 percent for the group.

Indonesia has a population still young while much of the world ages, a democracy that has produced five peaceful transfers of power since 1999, and an excellent fiscal position despite its low tax to GDP ratio. It has earned the right to be more ambitious; to stand up and be counted on the global stage.

But the growth that history demands today cannot only be high. It has also to be inclusive, or it will not hold the country together long enough to matter. A nation spread across thousands of islands and hundreds of ethnic communities does not stay unified on GDP growth alone; it stays unified when growth reaches Ambon as well as Jakarta.

Nation-building and high growth are not two separate projects competing for the same rupiah. They are the same project.

This is generational work, sustained across a change of government and a change of decade the way China’s and Korea’s own commitments were, not one finance minister’s project.

A rule invented in one evening in Paris, enforced ever since by institutions that have never themselves obeyed it, ignored outright by every economy that actually grew enough to matter, was not founded on the dry logic of economic reasoning. It was based on an inherited faith that defies both logic and the needs of the day.

In fact, Abeille’s 3 percent rule was never meant to answer any serious question at all. It was a guess, a hunch, a convenience of the moment that founded an economic theocracy.

Faith and investor confidence worked when the world stood still long enough to turn hunch into prejudice. That is not the case now.

Indonesia does not merely need a different figure to replace 3 percent. It needs to face the emerging global future with logic and reason rather than inherited faith. It is time for an open, rational debate about what kind of fiscal rule serves a country ready to stand inside Asia’s second pole and to breach the technological frontier.

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Indonesia’s Financial Shock of 2026: What the Rating Agencies Got Wrong

Indonesia’s Finance Minister Suahasil Nazara greeting the audience

Source: https://www.cnbc.com/2026/09/16/indonesia-finance-minister-msci-prabowo-.html



By

Satish Chandra Mishra

Dr. Satish Chandra Mishra, an economist educated at Oxford and Cambridge with senior past experience at the United Nations (UNDP), OECD, and USAID, is the Founder and Executive Director of Arthashastra Institute, Bali, Indonesia.

 

A Glass More Than Half Full

Indonesia’s story is one of the more remarkable transitions of our era. Within a single generation, the country has built the world’s third-largest democracy, reduced poverty from roughly a quarter of the population during the 1997–1999 Krismon crisis to 8.25 percent by September 2025, and decentralised political power to more than 500 popularly elected regional governments. Unemployment ended 2025 below 4.8 percent. Government debt stands at approximately 40 percent of GDP. Inflation ended 2025 below 3 percent. GDP growth has averaged close to 5 percent per annum for two decades, the 2020 pandemic contraction aside, and reached 5.11 percent in 2025. By any serious comparative standard, these are impressive fundamentals. But such credentials were not enough to save Indonesia from a concerted attack from the heavy hitters of the investment rating agencies and global index providers. II.  The Engineered Shock In a six-week window between late January and early March 2026, Indonesia experienced one of its most severe episodes of capital market instability in recent memory. The sequence merits scrutiny. On 22 January, President Prabowo delivered a well-received address at Davos, outlining Indonesia’s investment ambitions and the Danantara architecture. Five days later, MSCI froze index changes for Indonesian stocks and warned that it could reclassify Indonesia from Emerging Market to Frontier Market status, a demotion that would oblige emerging-market index funds to sell Indonesian equities. The next day the Jakarta Composite Index (JCI) fell more than 8 percent intraday, triggering a mandatory trading halt; a second halt followed the day after, and approximately USD 80 billion in market capitalisation was erased over the two sessions. On 5 February, Moody’s revised Indonesia’s sovereign outlook to negative. Fitch followed in early March with a negative outlook. The reasons offered ranged across market shallowness, governance anxieties over the dismissal of Finance Minister Sri Mulyani, concerns about Danantara’s management, and ancillary grievances including cabinet size and the school meals programme. The timing invites scrutiny. Whether by design or by the constrained logic of global financial markets reacting simultaneously to the same inputs, the effect was a sharp public rebuke at the precise moment Indonesia was projecting confidence and soliciting capital. III. 

The Credibility Problem

Any serious assessment of January 2026 must be set against the agencies’ wider record. That record is, to put it plainly, poor. The 1997–1998 Asian financial crisis is the most conspicuous example. Having failed entirely to anticipate the crisis, the major agencies then downgraded the affected economies more aggressively than the deterioration of their fundamentals warranted, amplifying panic rather than providing analytical ballast. Enron and Parmalat both carried investment-grade ratings until days before their collapses. The 2008 global financial crisis confirmed what the Asian crisis had suggested: the agencies systematically misrated vast quantities of subprime mortgage-backed securities, a finding the US Financial Crisis Inquiry Commission described as central to the financial meltdown. The conflict of interest embedded in the ‘issuer pays’ model had not been reformed — merely obscured. The structural bias toward procyclicality and herd behaviour visible in those failures is present in the January 2026 Indonesian episode. The question is not whether Indonesia has genuine structural challenges. It does. The question is whether the agencies’ interventions reflected a rigorous assessment calibrated to Indonesia’s specific historical and institutional context. The evidence suggests they did not.

The MSCI Question

A central irony of the MSCI intervention is that the structural characteristics it cited — market shallowness, concentrated ownership, limited free float — have been comprehensively documented for decades. A landmark 1999 World Bank study established that fifteen Indonesian family groups controlled 61.7 percent of total stock market capitalisation, and the single largest family group alone accounted for 16.6 percent. This architecture has been known to any serious analyst for more than twenty-five years. If the concerns were genuine and longstanding, why were they escalated into a market-destabilising public threat within days of the President’s Davos appearance, rather than addressed through the constructive regulatory engagement MSCI ordinarily employs? Indonesia’s Financial Services Authority (OJK) is aware of the free-float and transparency deficits and has set out reform targets in its Capital Market Development Roadmap. Meaningful reform of entrenched corporate ownership structures takes years, not months. A credible analytical institution would acknowledge this reality. Threatening destabilising reclassification on a politically compressed timetable serves no remedial purpose.

  Indonesia Is Not Greece, and It Is Not Argentina

The spectre implicit in the agencies’ interventions is sovereign default or fiscal crisis. This possibility deserves to be examined honestly, and honestly it deserves to be rejected. Indonesia has serviced its debts in full since the rescheduling that followed the 1997–1998 crisis. Its debt-to-GDP ratio of approximately 40 percent is well within any sustainable analytical range and is far lower than that of many developed economies carrying AA or AAA ratings. Its banking sector, reformed after the catastrophic failures of 1997–1998, holds capital well above regulatory minimums. Greece’s crisis arose from fiscal excess within a monetary union that removed the exchange rate mechanism, compounded by deliberate financial engineering to obscure public finances. Argentina’s recurrent crises reflect a specific history of monetary instability and creditor disputes that bears no structural resemblance to Indonesia’s situation. Drawing implicit analogies between Indonesia and these cases through rating outlooks and index signals is not responsible analysis. Rating agencies are well-suited to assess debt default probabilities in economies with stable institutional trajectories. They are structurally ill-equipped to evaluate the political economy of systemic transformation — which is precisely what Indonesia is navigating.

Toward an Honest Dialogue Among Equals

The January 2026 shock bears the hallmarks of an intervention whose timing and framing served purposes beyond objective credit analysis. What is clear is that the effect was a significant economic penalty administered at a moment of political transition — and that the analytical justifications do not withstand serious scrutiny. Indonesia, for its part, has genuine reform obligations. Greater stock market transparency, improved free-float ratios, a clearer governance and enterprise plan for Danantara, and a persuasive medium-term fiscal framework are all within reach. These reforms should be pursued not to placate foreign rating agencies, but because well governed institutions serve Indonesia’s own citizens first. The rating agencies retain a legitimate function. Reliable, impartial sovereign assessment channels capital toward creditworthy borrowers and signals genuine fiscal mismanagement. These functions matter. But they depend on credibility the agencies have repeatedly squandered — through the Asian crisis, the corporate rating scandals of the early 2000s, and the catastrophic misratings of 2008. What credibility remains rests on market convention, not demonstrated accuracy. What is required is an honest dialogue between Indonesia and the institutions that judge it — conducted between equals rather than between examiner and examinee, and one that takes a quarter-century of demonstrated institutional resilience seriously rather than treating each governance challenge as though it occurred in an institutional vacuum. The agencies aspire to teach. Perhaps, in the process, they will learn. That would be the first step toward the trust that both sides currently lack — and that both sides genuinely need.

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Baa Baa Black Sheep – if only former UK Prime Minister Starmer read his rhymes.

By

Aunul lslam, PhD (Imperial College, London)

Starmer resigns…

Source: https://www.facebook.com/TheScotsmanNewspaper/posts/keir-starmer-resignation-in-pictures-here-are-10-photos-that-tell-the-story-of-h/1469922515165033/

There are theories that Baa, Baa, Black Sheep reflects historical wool taxes in medieval England, particularly taxes associated with the wool trade. In that reading: 

  • “One for the master” refers to the Crown or ruling authority.
  • “One for the dame” refers to a local landowner or manor.
  • “And one for the little boy who lives down the lane” is seen as the small share left for ordinary people.

However, historians don’t agree that this was the rhyme’s original meaning. The earliest printed versions do not explicitly mention taxation, and there is limited evidence directly linking the rhyme to a specific tax policy. Many nursery rhymes attract political interpretations after the fact because their simple language lends itself to symbolism. 

So it’s fair to say the rhyme has been interpreted as a commentary on heavy taxation and unequal distribution of wealth. Still, it would be overstating the evidence to say it was definitely written for that purpose. 

If former UK Prime Minister Keir Starmer read the rhyme as a warning about taking too much from producers while leaving them with too little, then it becomes a political lesson about the consequences of overburdening farmers or other productive sectors.

Yes, taxes and policy reversals (“U-turns”) are often politically damaging because they can create a sense that a government is either: 

  • Taking more from people than expected, or
  • Lacking a clear, consistent plan.

That’s one reason nursery-rhyme metaphors can resonate in political debate. If someone interprets Baa, Baa, Black Sheep as being about producers handing over much of what they earn, it becomes an easy shorthand for arguments about taxation, especially among farmers or other groups who feel overburdened. 

Of course, supporters of higher taxes may argue they’re necessary to fund public services, while critics argue they can discourage investment and productivity. Similarly, what opponents call a “U-turn” might be described by supporters as a pragmatic response to changing circumstances. 

So the  point here is less about the literal meaning of the rhyme and more about its symbolic relevance: a warning that policies affecting those who create wealth or produce goods can have significant political consequences if they’re perceived as unfair.

Public reaction to government U-turns is often mixed, but in the case of controversial tax policies affecting farmers, there was significant public and sector-specific backlash before some reversals occurred. 

  • Farmers organized protests, including tractor demonstrations in Westminster, arguing that proposed inheritance tax changes would threaten family farms and make passing farms to the next generation more difficult.
  • Rural communities and farming organizations campaigned heavily against the policy, and ministers later said they had “listened closely” to those concerns when modifying the proposals.
  • The National Farmers’ Union welcomed the later changes as a relief for many farming families, suggesting the revised policy reduced some of the anxiety created by the original proposal.
  • Critics of the government argued that repeated policy reversals created an image of indecision and poor planning. Opposition parties portrayed the U-turns as evidence that ministers had misjudged public opinion.
  • Some Labour MPs reportedly became frustrated as well, with reports of concern inside the governing party about having to retreat from policies after defending them publicly.

More broadly, U-turns tend to produce two competing reactions: supporters see them as a government listening and adapting to concerns, while critics see them as a sign that the policy was flawed from the start. The balance between those views often depends on people’s existing political outlook and the specific issue involved.

However, Starmers downfall was not only these U-turns but his undignified stance as a so called human rights lawyer towards the Gaza genocide. When he was asked about the shutting of water and electricity in Gaza, his stance was pathetic as his reply was “Israel has the right to defend itself “

The U-turn here would have earned him a lot of respect! If not protecting his position as a Prime Minister.

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Bangladesh’s Missed Moment: How Yunus’s Hesitation Let Mob Violence Take Hold

By

Aunul Islam, PhD (Imperial College, London, UK)

Source: New York Times, 15/08/2025

Bangladesh has endured political upheaval before. What made the recent interim period stand out was not protest or dissent, but the scale and normalisation of mob violence—vigilante attacks, public beatings, and political reprisals carried out openly. According to the European Agency for Asylum, Bangladeshi human rights organisations “…documented the highest rates of deaths due to mob beatings in a decade”. This did not happen because Bangladesh suddenly became more violent. It happened because, at a critical moment, authority hesitated. That authority was led by Professor Yunus, a Nobel laureate.

Interim governments exist for one primary reason: to stabilise the state during transition. They are not ceremonial caretakers. They govern during the most fragile phase of political life, when early decisions shape long‑term outcomes. In Bangladesh, that responsibility was not met.

Authority existed — and that is the point

The most important fact in this debate is often overlooked: the Bangladeshi state did not collapse during the interim period. Police forces remained in place. Courts functioned. The administration operated. International recognition was strong. Authority existed.

Political philosopher Hannah Arendt makes a distinction that is crucial here. Power, Arendt argues, rests on legitimacy and collective acceptance. Violence appears when that power is weakened or abdicated. When violence spreads, it is usually not a sign of popular empowerment, but of authority failing to act.

Seen this way, Bangladesh’s experience points to omission rather than inevitability. Leaders do not need to encourage violence to be responsible for its spread. Hesitation, delayed enforcement, and mixed signals are enough. In fragile institutional settings, restraint is rarely read as wisdom. It is read as permission.

How perpetrators of mob violence learned they enjoyed impunity

Sociologist Charles Tilly helps explain how this dynamic unfolds. He shows that mob violence is shaped by signals and incentives, not chaos. People watch what happens after the first incident. If early violence is punished quickly and consistently, it often subsides. If it is not, others follow.

Bangladesh fits this pattern. Analysts inside the country have pointed out that mob violence did not previously occur at this scale. Its expansion followed a familiar sequence: early incidents went insufficiently addressed, expectations of impunity formed, imitation followed, and violence became normalised. Each unpunished act lowered the threshold for the next.

Once this process begins, restoring order becomes far more difficult. By the time condemnations are issued, the street has already learned that enforcement is uncertain.

This was not inevitable

Defenders of the interim period often argue that the violence was unavoidable given the intensity of political change. That argument is weak. Transitions are volatile everywhere, but they also offer a narrow window where clear boundaries can be set. Early arrests, visible prosecutions, and unambiguous messaging can quickly shape behaviour. Bangladesh missed that window.

This is not a cultural story, and it is not about importing ideas from abroad. Modern democracies do not practise vigilantism. The issue is contextual misjudgement—applying restraint suited to strong institutional environments in a weak one.

The lesson and an anti-thesis of Arendt and Tilly

Bangladesh’s experience offers a stark lesson. Interim governments wield real power, even if temporarily. When that power is not exercised clearly and early, violence fills the gap. Arendt explains why violence signals failed authority. Tilly explains how inaction turns disorder into routine. Together, they show why mob violence in Bangladesh was not fate, but the result of a missed moment—and why accountability for that failure matters.

The above would partially explain according to Arendt and Tilly. The real reason is the disposition of the central character of the mob violence, Professor Yunus. It may sound preposterous but reflecting on his rule, or rather misrule, one can easily argue, that he came with a personal vendetta against the previous Government. He seized the opportunity to expand his own agenda of the Grameen group taking over many sectors. The mob violence was a “false flag” for him!

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Viral Empire: How Microbes Reflect Human Power Structures

Source: https://grahamhancock.com/wattsp1/

Viral Empire: How Microbes Reflect Human Power Structures

By Aunul Islam, PhD (Imperial College, UK)

Modern power no longer operates primarily through borders or armies but through networks—supply chains, information flows, technology, and interdependence. In this sense, contemporary geopolitics resembles microbial systems more than traditional empires.

Microbes exert influence through connectivity, adaptation, and asymmetry. Small organisms can destabilise large systems by exploiting vulnerabilities, just as minor interventions can trigger outsized effects in a networked world. Power depends less on scale than on speed, positioning, and resilience.

Like microbes, political systems evolve under pressure. Expansion produces resistance, cooperation strengthens survival, and rigid structures fail in volatile environments. The greatest risk is not defeat by rivals but internal systemic collapse.

Seen this way, global power functions as a living ecosystem—adaptive, fragile, and continuously contested rather than permanently controlled.

In the above narration, the scientific expressions like mutation, virulence in the microbes behaviour have been translated in the business and strategic literature to relate them to humans. But this literature lacks sufficient emphasis on the destruction through wars and conflicts by humans on core aspects of their own life. This entails destruction of properties and other supporting elements such as hospitals, energy production etc.

At this juncture, the anti-thesis to above narratives is that human empire or a Supreme Empire do not adhere to the simple modalities in present day geopolitics. The present empire dictated by a lone country (USA) along with its lackeys is no longer a traditional empire as depicted previously. The viral empire like that of the bubonic plague or even the Covid-19 virus are now long forgotten past. The present Super Empire is best described as the worst of its kind, genocidal in nature and any other terms that can be used to describe it, where new words have to be added to the dictionary.

The last hope of the present world order is that the super empire does behave like a viral empire and succumbs to its own systemic collapse. Maybe this will happen in the next few decades!

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